Cyprus gave a shortlived boost to gold and silver prices but they have since declined sharply even though the Eurozone continues to face serious problems and tensions are rising in the East. What is going on in the markets?

LONDON (MINEWEB) – A perhaps misleading perception that the immediate Eurozone crisis regarding Cyprus has been brought under control led initially to stagnation in the gold price, and subsequently a sharp fall, with a number of observers feeling that prices could yet fall further quite dramatically in the short to medium term with any upwards momentum absent for the time being – or until the next crisis!

Silver has, perhaps, been even more disappointing, slipping back below the $27 mark and to a gold silver ratio of around 58. It seems that yet again bad news is not reflected in positive reaction in the precious metals sector.

One suspects that Eurozone economics are in a sufficiently difficult state that something similar to the Cyprus event could crop up again at any time, but it is also apparent that the EC is desperate not to allow the single currency experiment to falter and die and is prepared to do whatever it takes to prevent any country, however small, from being forced to exit from European Monetary Union.

Those countries which use the Euro are too heavily entwined within the system to give it up willingly, even if it would mean they would be much more in control of their own destinies if they could operate with their own currencies and, if necessary, devalue their way out of the principal problems.

The Eurozone countries with the biggest problems are mostly heavily reliant on tourism for a good proportion of their income. The Euro makes them expensive to go to. A devalued local currency could thus open the competitive tourism floodgates and give a huge immediate boost to employment and the economy, but that just doesn’t seem to be an option either the EU, or the respective countries’ governments are willing to consider.

Much capital has been made of the big stakeholders in the Cyprus banks being faced with up to a 40% or more ‘haircut’ on their holdings as part of the EU rescue deal, but perhaps they should not be quite so upset.

This may be seen by some as legalised theft, but consider the fact that firstly they had been receiving a higher interest rate on their cash than they could have achieved elsewhere in the Eurozone because of the risk factor with regard to Cyprus accounts – and if Cyprus had been forced out of the Eurozone and had had to reinstate its own old currency, then the devaluation which would have inevitably followed would probably have been equally severe – but this decline in value of their bank holdings would somehow have been viewed in a totally different light even though the effects, especially for foreign investors, would effectively have been the same – or perhaps even worse.

But Europe is not the only global arena which could affect the gold price. An increasingly belligerent North Korea with an inexperienced leader at its helm who seems to have little grasp of political reality could well generate serious instability in the region with some kind of military strike against a South Korean or American base in the region.